US gives China's central bank breathing space for interest rate cuts
Declining mortgage rates could drive wave of advance repayments, China's US treasury holdings drop to GFC-era levels.
Our briefing on critical economic and financial developments in China as of Tuesday, 23 July, 2024:
Easing inflation and jobs figures in the US give the Chinese central bank breathing space to cut interest rates, as well as make adjustments to monetary policy execution.
BlackRock continues to bet big on Chinese A-shares.
12 key economic takeaways from China’s historic Third Plenum meeting.
China wants new reforms to help Shanghai’s NASDAQ-style board to drive national tech independence.
Mortgage rates drop across Chinese cities, 100 basis point gap could trigger wave of advance repayments.
China’s central bank and other financial regulators commit to upholding Communist Party’s leadership following the Third Plenum.
Chinese holdings of US treasuries approach lowest levels since GFC.
Easing US inflation gives Chinese central bank breathing room for rate cuts, changes to monetary policy execution
Chinese analysts say recent shifts in US economic data gave the People’s Bank of China (PBOC) - which is the Chinese central bank, the breathing space to push through through with rate cuts, highlighting the extremely interconnected nature of the global financial system despite ongoing Sino-US trade tensions.
China's latest loan prime rates (LPR) came in at 3.35% for the 1-year LPR and 3.85% for the 5-year LPR, according to an announcement authorised by the People’s Bank of China (PBOC), which is the Chinese central bank, on 22 July.
Both these readings mark declines of 10 basis points compared to the previous month.
On 22 July, PBOC also announced that it would reduce the rate for its 7-day reverse repos by 10 basis points, to 1.70% from 1.80%.
A report from Minsheng Macroeconomic Group (民生宏观团队研究) states that key factors behind the rate cuts lay in easing external pressure, with US inflation and labour market figures dialling down markedly in the second quarter, leading to expectations of cuts from the Fed.
"At present the market considers rate cuts by the US Fed in September to be a certainty, objectively increasing [China's] monetary policy space."
Minsheng Macro considers the urgency of rate cuts in China to have increased, after GDP growth slowed to 4.7% in the second quarter.
"Considering export pressure could marginally increase in the second half, at present the need for policy to prop up the economy has risen, and it’s rational to have rate cuts at present."
Minsheng Macro also highlighted the shift in the execution of monetary policy presaged by the timing of the cut to the 7-day reverse repo rate.
Since LPR reforms launched in 2019, rate cuts have usually involved adjustments to 7-day reverse repo and medium-term lending facility (MLF) rates in advance, before the LPR subsequently adjusts.
On this occasion, however, the 7-day reverse repo rate and the 1-year and 5-year LPRs all fell 10 basis points simultaneously.
"Given previous statements from central bank chief Pan Gongsheng on confirming the use of short-term open market operations rates as the main policy rates, the benchmark for the LPR may have already changed from the 1-year MLF rate to the 7-day reverse repo rate."
BlackRock continues to bet big on Chinese A-shares
BlackRock, Fidelity, Neuberger Berman, Schroders, and AllianceBernstein have all recently released their quarterly reports, pointing to copious holdings of Chinese A-shares.
A report from Shanghai Securities Journal says overseas funds are on track to further expand their Chinese shareholdings before the end of 2024.
"With regard to investment opportunities in the third quarter, several foreign fund managers said that they have discovered multiple investment opportunities in various parts of the A-share market, including high dividends, upstream resources and technology stocks."
12 key economic takeaways from China's Historic Third Plenum Meeting
State-owned media has just published the full resolution passed by the Communist Party's 20th Central Committee at its historic Third Plenum, held from 15 - 18 July.
Here is list of 12 of the key economic policy points from the Third Plenary Session - considered the most consequential economic meeting in China since the start of the 2020's:
Further comprehensively deepening of reform, and advancing the major significance and overall demands of Chinese-style modernisation.
The outlining of new goals. By 2029 - the 80th Anniversary of the founding of the People's Republic, complete all the reform missions outlined by the Third Plenum's resolution. By 2035, China now aspires to have "comprehensively established a high-level socialist market system," and by mid-century it hopes to "comprehensively established the firm foundations for a modernised socialist great power."
Establishing a high-level socialist market economy.
Establishing a national single market, with unified systems and market regulations.
Improving the foundational systems for the market economy and improving China's system of property rights.
Expediting the in-depth integration of the real economy with the digital economy.
Improving and upgrading the resilience and security of industry chains.
Deepening science and technology reforms. Optimising key new scientific and technological organisations and mechanisms, with a focus on the cutting edge of global science and technology and the "main economic battle grounds."
Improving the macro-economic management system.
Improving coordination mechanisms for national strategic plans and policies.
Deepening reform of the fiscal and tax system.
Deepening reform of the financial system. Improving the central banking system and clearing out monetary policy transmission mechanisms.
China wants Shanghai's NASDAQ-style board to drive tech independence with new reforms
On 19 June, China's securities regulator released the "Eight Measures on Deepening Reform of the Shanghai Stock Exchange Science and Technology Innovation Board and Servicing Science and Technology and the Development of New Quality Productive Forces (关于深化科创板改革服务科技创新和新质生产力发展的八条措施).
A report from Securities Daily published a month after the release of the Eight Measures said they “mark the re-launch of STAR Market reforms," with a "focus on strengthening regulatory and risk prevention to expedite the main line of high-quality development."
The newly released "Eight Measures" are intended to better employ the role of the STAR Market in driving China's tech independence, amidst worsening trade tensions with advanced economies in North America and the EU.
The China Securities Regulatory Commission (CSRC) said the reform measures seek to "raise the role of the capital market and better serve the new mission of Chinese-style modernisation."
The move arrive five years following the launch of the Science and Technology Innovation Board (STAR Market) in Shanghai, as a specialist equities market intended to emulate America's Nasdaq exchange.
Mortgage rates drop across Chinese cities, 100 basis point gap could trigger wave of advance repayments
Chinese property analysts anticipate a wave of early repayments of mortgages, following a drop in home loan rates in response to the landmark loosening of credit restrictions by the China’s central bank in May.
21st Century Business Herald reports that as of May 2024, the average first home loan rate stood at 3.45% across 100 Chinese cities surveyed, for a decline of 55 basis points compared to the same period last year.
The average rate for second-home loans was 3.90%, for a decline of 101 basis points. Domestic analysts expect the move to spur a wave of early repayments by mortgage borrowers, as they make haste to reduce their home financing costs.
On 17 May, the People's Bank of China (PBOC) announced that it would permit reductions in minimum down payments for mortgages, as well as remove the floor on rates for both first and second home loans, in order to boost the health of the faltering Chinese property market.
First home-loan rates currently stand at 3.5% in all four of China's first-tier cities of Beijing, Shanghai, Guangzhou and Shenzhen - 45 basis points beneath the benchmark loan prime rate.
Chinese central bank commits to upholding Communist Party's leadership following historic Third Plenum
The People's Bank of China (PBOC) - which is the Chinese central bank, has convened a meeting declaring its commitment to upholding the leadership of the Communist Party, just following the convening of the Party's historic Third Plenary Session on economic policy from 15 - 18 July.
The meeting convened by PBOC chair Pan Gongsheng (潘功胜) on 19 July declared that the Chinese central bank will "firmly uphold the unified and concentrated leadership of the Party Central Committee with regard to financial work," as well as "thoroughly implement the Party's leadership in all aspects of work."
China's other key financial agencies also followed suit, with the China Securities Regulatory Commission (CSRC) and the National Financial Regulatory Administration (NFRA) also convening meetings to uphold the Communist Party's leadership on 19 July.
China's holdings of US treasuries approach lowest levels since GFC
Figures from the US Treasury International Capital (TIC) System indicate that China cut its holdings of US Treasuries by USD$2.4 billion in May, marking the fourth month of decrease since the start of the year, following a one-off uptick in April.
China's holdings of US treasuries stood at USD$768.4 billion in May, to once again approach the figure for March, which marked the lowest point since March 2009, when the world was still in the throes of the Global Financial Crisis.
Since April 2022, China's US treasury holdings have continually remained below the USD$1 trillion level. Ever since June 2019, Japan has pipped out China as the largest foreign holder of US treasuries.